East African Breweries Limited (EABL), a prominent regional liquor manufacturer, has encountered a 22% drop in post-tax profits during the first half of the current financial year, ending December 2023. Despite a 16% increase in net sales to Ksh66.5 billion ($409.2 million), the company faced challenges from the depreciation of the Kenyan shilling and a prolonged drought in the region, impacting its profitability.

Key factors affecting profitability:

1. Foreign Exchange Losses:
   • EABL reported significant forex-related losses in Kenya, amounting to Ksh2.3 billion ($14.15 million), a more than tenfold increase compared to the same period last year.
   • The depreciation of the Kenyan shilling contributed to the foreign exchange losses, putting pressure on the company’s financials.
2. Input Scarcity and Increased Imports:
   • The scarcity of locally sourced inputs, particularly grains and ethanol, was a result of a prolonged drought that adversely affected harvests in the region.
   • The company, which traditionally sourced over 80% of its inputs locally, had to shift its strategy and import nearly 70% of ethanol, impacting its cost structure.
3. Rise in Cost of Sales:
   • EABL’s cost of sales increased by 21% to Ksh37 billion ($227.7 million) due to the scarcity of locally sourced inputs and the rise in forex losses.
   • Factors such as barley, wheat, sorghum, and other grains, which were previously sourced locally, experienced reduced harvests, necessitating increased imports.

Strategies for recovery:

1. Cost efficiency initiatives:
   • EABL plans to focus on enhancing cost efficiency in the second half of the year by negotiating better terms with suppliers, optimizing manufacturing processes, and managing operational costs effectively.
2. Marketing investments:
   • Despite economic challenges, the company intends to increase marketing spend to promote its products and maintain a consumer-centric approach to address market dynamics.
3. Introduction of new beer brands:
   • To stimulate profit growth, EABL is set to introduce new beer brands in the Kenyan market, diversifying its product portfolio to meet evolving consumer preferences.

CEO’s perspective and future outlook:

1. Focus on cost-efficiency:
   • EABL’s CEO, Jane Karuku, emphasizes the importance of cost-efficiency measures, including strategic sourcing, operational optimization, and prudent cost management, to enhance margins.
2. Market dynamics and taxation Challenges:
   • The CEO acknowledges the challenging economic conditions and notes that the company could have faced more significant challenges if excise taxes had increased further during the reporting period.

Despite facing headwinds from forex losses and input scarcity, EABL remains optimistic about recovering its profit growth in the second half of the financial year. The company’s strategic focus on cost efficiency, marketing initiatives, and product diversification reflects its commitment to navigating the complex business environment and sustaining long-term profitability.